Abstract
The paper examines the effects of United States productivity shock on components of Nigeria’s external sector. Using a structural Macroeconomic Model (SMM), the paper modelled Nigeria’s external sector by using ten behavioural equations and four identities. The SMM was simulated, using a 3% increase and 3% decrease in US productivity to elicit responses of Nigeria’s external sector components to this shock. Using quarterly data from 1981 to 2015, the paper found that both positive and negative US productivity shocks elicited symmetrical responses from Nigeria’s external sector components. Also, both positive and negative shocks had little effects on Nigeria’s current account balance, imports, exports, foreign direct investments and reserves. However, positive shocks increased remittances inflow, a depreciation in nominal exchange rates, a reduction in foreign portfolio investment position, and a reduction in foreign debt flows. The responses for a negative US productivity shock were just the direct opposite of a positive shock. Our finding shows that, the components of Nigeria’s external sector will respond in like manner to both positive and negative shocks to United States productivity.
Highlights
Using the estimated behavioural equations, we introduce all the variables—endogenous and exogenous—and identities into the structural Macroeconomic Model (SMM) and solve the SMM block using the Gauss-Seidel method
We introduce different scenarios to capture our assumptions of changes to the exogenous shock variables, while assuming that the conditions within the baseline will hold true in the future
In simulating the effects of foreign country productivity shock, the study first assumed that foreign country productivity increases by 3% for positive shocks and simulate the responses of the external sector components
Summary
The disturbances—stochastic economic actions by both domestic and foreign economic agents—that originate from abroad as well as those originating domestically have significant influences and repercussions These repercussions are transmitted through the components of the external sector to domestic macroeconomic variables [6]. The disturbances that originate from abroad are not controlled by domestic economic policies, unlike disturbances that originate from within the economy These foreign disturbances are the exogenous shocks. Shocks may be a significant change in the value of a variable from its underlying trend or a sudden event beyond the control of authorities that has a significant impact on the economy [7]. This study focuses on the effects of exogenous shocks from abroad on the components of the external sector
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